Lustig Law Firm Estate Planning Blog

The Tax Cuts and Jobs Act (the “Act”) became effective on January 1, 2018. This law has the most sweeping impact on existing Estate Plans since the Reagan administration. In fact, we believe almost all married couples will want to change the formula language in their existing Living Trusts that has been the “gold standard” for tax planning purposes since the 1980’s. We have summarized some of the more notable changes below:

1. Doubling of the Estate, Gift and GST Exemptions

The estate, gift, and GST exemptions are doubled to $11.2 million per person and $22.4 million per married couple. This increase expires on December 31, 2025, at which time the exemption amounts will return to $5.6 million per person and $11.2 million per married couple (indexed for inflation).

2. “Stepped-Up” Basis Retained

The Act retains the rules governing a “stepped-up” income tax basis at death. Therefore, when a person dies, his or her assets (including 100% of the community assets) will receive a new income tax basis so that the assets can be sold post-death with no capital gains tax.

3.“Portability” Retained

The Act retains the rules allowing a spouse to give his or her estate tax exemption to the surviving spouse, by making an election on an estate tax return when the first spouse dies. This effectively replaces the need for married couples to have a Family (Bypass) Trust to obtain a double estate tax exemption.

Given the fact that most estates will no longer be taxable due to the increased exemptions, coupled with the retention under the new law of exemption “Portability”, planning to reduce income taxes at death for many couples may be preferable to avoiding estate tax.

Planning Opportunity – Income Tax Savings: Existing estate plans for clients with nontaxable estates (e.g. those under $10 million) that currently provide for a Family (Bypass) Trust at the first death should be reviewed, and in many cases modified, to ensure all assets receive a step-up in cost basis at the surviving spouse’s death, to minimize capital gains taxes when the assets are sold. Special care must be taken to accomplish this in a manner that preserves the asset protection and family disinheritance benefits of a Bypass Trust.

Planning Opportunity – Estate Tax Savings: The doubling of the estate, gift, and GST tax exemption opens a significant, once-in-a-lifetime opportunity for you to protect more assets than ever. Combined with the IRS’s withdrawal of the anti-discounting Section 2704 regulations last year, tax reform opens the door for specialized use of existing irrevocable trusts, family partnerships, discounted gifts, and other strategies that could shield entire fortunes for your beneficiaries.

You may be tempted to wait, given that seven years may feel like forever. But remember that this tax legislation is likely to be heavily modified if the political pendulum swings in the other direction. (The clock is already ticking steadily towards the 2018 midterms and 2020 Presidential election.) Of course, we have tools that can build flexibility into your plan, including trust protectors, decanting powers, and other strategies to deal with future changes. But those future strategies only work to preserve options, if we implement plans while the exemption is available.

4. Increases to Annual Gift Tax Exclusion

An individual is now permitted to make gifts of up to $15,000 per year to any donee ($30,000 for married couples), without reducing their lifetime exemption ($11.2 million).

Be careful: Just because the Act allows up to $30,000 of tax free annual gifts per couple, it may not be beneficial to continue an annual gifting program, given the increase in the estate tax exemptions, and the benefits of a “stepped-up” income tax basis at death. Of course, if gifting to family members is still desirable, consideration should be given to “cash gifts.”

5. Changes to Business Taxation

The Act creates a new deduction for qualified business income for certain owners of sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. The owners of these pass-through businesses will be able to deduct 20 percent of certain types of non-salary “business income” on their personal income tax return, bringing the top marginal tax rate down to 29.6 percent.

Planning Opportunity: If you own a partnership or family business or are thinking about starting one, contact us immediately. Relying on old rules of thumb or ignoring this monumental change in business taxation as you make business plans could mean paying enormous amounts of unnecessary taxes.

Many of the new, business-oriented deductions have specific rules to qualify. Although, the new law has been the subject of intense media discussion, don’t rely on television programs, blog posts, or press releases. Instead, contact us so we can analyze how to maximize your benefits under the Act.

We are available now to answer your questions about tax reform and work with you to take full advantage of the opportunities. Please call our office at (972) 960-1003 to schedule an appointment.